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The performance of the “Magnificent Seven” stocks last year was truly extraordinary. As measured by the equal-weight S&P 500 Index, the average large cap stock had returned 0.3% through the first three quarters last year, whereas the market cap-weighted S&P 500 was up 11.7%. Including dividends, Apple (AAPL) – the “worst” performer of the Seven – had returned 32.3% and NVIDIA (NVDA) was best with a 197.8% return. The Magnificent Seven performance gap with the broad market tightened during the fourth quarter, obscuring a longer and more relevant story: as of year-end 2023, the Magnificent Seven represented 27.9% of the S&P 500 market cap weight and therefore its future return prospects, good or bad.  

Technically speaking, the Magnificent Seven aren’t all tech stocks, as Amazon (AMZN) and Tesla (TSLA) are considered Consumer Discretionary and Alphabet (GOOGL) and Meta (META) are in the Communication Services sectors. Only Apple, Microsoft (MSFT), and NVIDIA are classified as Information Technology companies by Standard & Poor’s. Although intuitively, we all know that Amazon’s dominance isn’t due to the books it sells, and Google hasn’t become Google simply by producing catchier ads. To borrow from the 1992 Clinton-Gore campaign, it’s the algorithms, stupid. 

A Longer View 

In the roughly 15 years since the trough of the Global Financial Crisis, only two sectors have outperformed the broader index: 

This list excludes two current sectors: Real Estate which was split out from Financials on August 31, 2016, and Communication Services, part of Information Technology prior to September 28, 2018. These returns weren’t the products of just a few fantastic or dismal years, though. The good” sectors tended to lead year-by-year, and “bad” sectors tended to lag: 

What can we say about these sector returns? First the positives: the “financialization” of the U.S. economy is no longer the risk it appeared to be during the crisis, at least from the perspective of market capitalization. We also note that Information Technology, Consumer Discretionary, and Health Care companies represent areas of U.S. global economic leadership – segments of genuine innovation, producing actual goods and desired services. 

But the absolute dominance of Technology stocks – whether officially Tech, or stealth Tech – poses a challenge for investors in early 2024. Is a passive Tech allocation ever too big? More specifically,  

  • When will the centralization of the Internet into server farms owned by Amazon, Microsoft, and Alphabet arouse anti-competitive consternation among regulators? 
  • Will speech become even more regulated, facilitated by the ease of regulating fewer, larger Tech companies? 
  • As artificial intelligence usage spreads, will all sectors become slightly different flavors of Tech? 

Between Tech Bubble 2.0 and Complacency 

Peloton’s response to Tech dominance has and will continue to evolve. Our best thinking currently is that unlike 25 years ago, there is no similar Tech bubble to worry about today. Leading technology companies then were much more likely to build hardware rather than software, and even software revenues were more cyclical, fluctuating around releases of upgrades. Software as a Service and subscription models today smooth revenues and with them, the risk of stock bubbles.  

By the same token, we think there are good reasons to avoid outsized, passive allocations to just the largest Tech companies. Regulatory threats are real and consumer preferences are always changing. A no bubble view won’t ever mean disengagement.  

We expect to continue to invest in great companies and great sectors, even when regulatory uncertainty and concentration threats loom. More specifically, we expect to remain cognizant of sector weights, but place more emphasis on broadening the allocation among stocks within the Tech sector. As growth investors, we see our job as investing our clients’ money in great companies, some of which are great today, and in others which will become great tomorrow.   

Disclosures 

Past performance is no guarantee of future results.  Peloton owns the common stock of Apple, Inc., Microsoft Corp., NVIDIA Corp., Tesla, Inc., Amazon.com, Inc., and Alphabet, Inc. in its managed strategies or as non-discretionary positions in certain client portfolios. Peloton does not own the common stock of Meta Platforms, Inc. Investing involves risk, including possible loss of principal.  Diversification may not protect against market risk or loss of principal.  The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities.  Actual investor results may vary. 

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